Reduction in basic rate by 1% starting in April 2023
New chancellor Kwasi Kwarteng has announced that the basic rate of income tax will be reduced from 20% to 19% scheduled to begin in April 2023, rather than April 2024, as previously planned. The change, however, will not apply to Scotland, where income tax bands differ. In the modern Income Tax system, the basic rate will be at a historic low of 19%. The reduction in the basic rate will benefit basic rate taxpayers by £130 on average and higher rate taxpayers by £360. There will be a four-year transition period for gift aid relief in order to keep the Income Tax basic rate relief at 20% until April 2027. This is worth over £300 million and will support close to 70,000 charities.
Abolition of the Additional Rate of Income Tax (45%)
Furthermore, the government has abolished the Additional Rate of Income Tax. As a result, rather than an additional 45% on earnings over £150,000, there will be a single higher rate of 40%. The government has taken this action for a variety of reasons: to encourage initiative and hard work and to simplify the tax system, which also increases UK competitiveness. High tax rates affected the UK's competitiveness; switching to three rates (0%, 19% and 40%) will produce one of the OECD's simplest rate structures. The dividend additional rate will also be abolished, and the dividend upper rate will be lowered to 32.5% from the 6th April 2023. Individuals who would have paid taxes at the additional rate will begin receiving a Personal Savings Allowance of £500 in April 2023, the same amount as higher rate taxpayers. They had never had access to this before.
Cancellation of the Corporation Tax Increase
According to the previous government's plans, the rate of Corporation Tax would be raised from 19% to 25% in April 2023 for firms making more than £250,000 profit, which accounts for approximately 10% of actively trading companies. The government has now cancelled the planned increase and the rate will remain at 19% for all businesses, regardless of profit. According to the UK government, having competitive business taxes is crucial for expanding the economy because it can encourage investment and business. By fostering an environment where businesses can flourish and produce more jobs and foreign investment in the UK, the government hopes to boost the country's economy. The competitive corporate tax structure of the UK can encourage business investment, which raises productivity and fuels economic growth. As a result, consumers may pay less, employees may earn more, more jobs may be created because of business expansion and living standards in the UK may improve.